September has typically been a rude awakening for investors who’ve grown a bit comfortable with the relative calm through the summer months. With all the AI doomsday chatter, rate-hike commentary, higher oil prices, inflation fears, tariff terrors, and mounting tensions in the Middle East, it might come as a surprise to see the TSX Index and the S&P 500 less rattled and within a few percentage points of all-time highs.
Indeed, it just doesn’t seem to make a lot of sense, but in my view, this speaks to the tremendous resilience of the stock market, especially Canada’s stock market, which, while a bit choppier lately, has found a way to come back, even from the scariest of trading days.
During the midweek, it felt like the TSX Index was ripe for a nasty rollover. Valuations were slightly heated, and the list of concerns just seemed to keep growing. So, when the TSX Index dipped by more than 1%, it felt uneasy to step in there and buy the dip, especially since higher rates south of the border could pressure the Bank of Canada and policy in Canada.
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Welcome to volatility season!
If it’s not lingering inflation, perhaps it’s the falling loonie relative to the greenback that could warrant a hike soon. Either way, the bond market seems to be pricing in a higher chance of a hike. Of course, rate hikes are a nasty-tasting medicine to swallow for many stocks, but a necessary one, especially when inflation remains stubborn.
While it’s hard to tell how the second half of September (a historically stomach-churning month for stocks and the broad markets) will go, I do think that volatility may very well be the new normal. And it might stay that way once September is in the rearview.
As bond yields march higher and more central banks start raising the bar on rates, there’s fear that higher costs of borrowing could pave the way for another 2022-esque kind of bear market. In any case, sometimes, all it takes is a day (or even a few hours) for the market to calm and investors to digest the full extent of what just happened.
Taking care of inflation is a good thing, even if it means having to deal with something that typically works against stocks. In any case, Thursday’s relief rally session showed that bad news doesn’t have to be terrible for stocks. In fact, this resilient market might find its way back to new highs as AI and other productivity-driving efforts power earnings growth that allow markets to overcome a wall of worry, so to speak.
Sticking with quality and dividends
In my view, iShares Core MSCI Canadian Quality Dividend Index ETF (TSX: XDIV) is worth holding as you get paid to wait for the volatility season to come and go (or maybe it’ll stick around far longer than expected this time).
In any case, the XDIV sports a nice 3.12% yield by investing in a basket of very high-quality Canadian large caps, from banks to insurers to energy and utilities, with the odd consumer cyclical. With a remarkably low (arguably the most competitive for a quality, large-cap dividend ETF) management expense ratio of just 0.11%, you’re not paying much for some of the finest dividend payers (and growers) in the country.
So, don’t let the volatile season get to you. Hang on, and if there are more road bumps, perhaps treat the 1% single-day drops as opportunities to keep adding to a position.
